WILMINGTON, Del. (CN) — A California skin-care company sued Canadian pharmaceutical giant Valeant Pharmaceuticals for $40 million, claiming Valeant tricked it into selling its acne medicine through a payment scheme in order to sell it later for a windfall profit.
University Medical Pharmaceuticals Corp. says in the federal lawsuit that it sold its AcneFree line of products to Valeant under an agreement that paid $64 million up front with promises to pay $40 million more after certain sales milestones were achieved.
But Valeant never paid any milestone payments, and now it’s selling AcneFree and two other product lines to L'Oreal for $1.3 billion, according to the March 2 complaint.
University Medical says Valeant CEO J. Michael Pearson negotiated the deal with it in 2012, promising that the sales milestones for AcneFree would be easily met within the five-year time limit.
Pearson also promised to try to expand AcneFree sales into Mexico, Brazil and Asia, which “would generate enough new net sales revenue to achieve the $52 million payment milestone,” and spend millions of dollars in a marketing campaign, according to the complaint.
Because Valeant “had a sales force over 50 times greater the size of University Medical's sales force, and the defendant had access to some of the largest distribution networks for pharmaceutical products in the world," University Medical says it believed the promises.
But it says that none of these promises were kept, and that at “the time Pearson made these representations, he knew they were not true. Pearson never expected or intended to pay more than the upfront payment.”
The plan all along was for Valeant to “engage in little to no marketing of the AcneFree product line” so that Valeant “could sell the product line to another company for an amount far greater than the upfront payment amount,” the complaint states.
After the acquisition Valeant did not ramp up its marketing efforts to sell more AcneFree, but did the “opposite of what was commercially reasonable for the Defendant to do,” University Medical says.
In fact, Valeant actually hampered AcneFree sales by yanking its existing promotions in circulars, paring down the product line and placing the existing AcneFree products on the bottom of the shelf at retailers. As a result, AcneFree sales dropped from $32 million annually in 2012 to $24 million in 2013 and $17 million in 2014, University Medical says.
It claims that Valeant “used the sales milestone as a ruse to trick University Medical into parting with its leading product line for what the Defendant wanted to pay.”
And once the five-year milestone period ended, Valeant found a buyer actually interested in developing the brand, “allowing the defendant to pocket the difference between the brand's value and the upfront payment as a windfall profit.”
On Friday L'Oreal completed its purchase of AcneFree, the CeraVe brand portfolio and the AMBI brand portfolio from Valeant for $1.3 billion.
Valeant said in a January news release that the three product lines generated annual revenue of approximately $168 million.
University Medical is represented by Paul A. Fioravanti Jr. in Wilmington, and Todd C. Theodora with Theodora Oringher in Costa Mesa, California. It seeks at least $40 million in damages for common law fraud, breach of contract and breach of faith.
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